Pound slips as dollar steadies ahead of U.S. CPI data

The British pound edged lower on Tuesday as the U.S. dollar stabilized ahead of the release of crucial U.S. consumer price index (CPI) data, which investors expect to shape near-term Federal Reserve policy expectations.

Sterling fell 0.1% to $1.2715, retreating from a one-week high of $1.2750 touched earlier in the session. The currency remained under modest pressure as market participants positioned for the CPI report, due later on Tuesday, which could signal whether the Fed will maintain its current monetary policy stance or consider further adjustments.

The dollar index, which measures the greenback against a basket of six major currencies, held near a two-week low of 104.10, reflecting cautious trading ahead of the inflation data. Analysts noted that any surprise increase in U.S. inflation could reinforce bets on a prolonged period of higher interest rates, potentially boosting the dollar further.

"The market is in a wait-and-see mode until the CPI figures are released," said a senior FX strategist at a major bank. "A hotter-than-expected print would likely lead to a repricing of Fed rate expectations, which could lift the dollar and weigh on sterling."

The pound’s decline was relatively contained, with traders citing support from recent hawkish remarks by Bank of England officials. However, the currency’s upside remained limited as investors focused on the broader macroeconomic backdrop, including global growth concerns and geopolitical risks.

Against the euro, the pound was largely flat at 85.35 pence, with the single currency consolidating gains from earlier in the month. The European Central Bank’s recent signals of potential rate cuts have kept the euro underpinned, limiting sterling’s advance.

Market attention will remain on the U.S. CPI data, with economists forecasting a headline inflation rate of 3.1% year-on-year, down from 3.3% in July. Core CPI, which excludes volatile food and energy prices, is expected to ease to 3.2% from 3.2% previously.

Any deviation from these estimates could trigger volatility in currency markets, particularly in GBP/USD and EUR/USD pairs. Traders are expected to adopt a defensive stance until the data is released, with liquidity likely to thin ahead of the report.